Following the tax proposals put forth by Obama, Hyderabad, known as ?Cyberabad?, is cautiously trying to infuse confidence among the IT companies. The IT industry in Andhra Pradesh accounted for 52% of the total exports at Rs 35,672 crore for 2007-08 and the contribution of the state in the IT exports to the national exchequer rose from 8.62% in 2003-04 to 14% in 2006-07. Stressing on the interdependence between US andIndia, the industry in Hyderabad seem to have gathered little strength over the new tax proposals and they hope to get clarity after a review in due course. It feels that investors and clients see globalisation plans as more strategic and beyond short term and marginal tax dollars.
M Narsimha Rao, President, Hyderabad Software Exporters Association says, ?We are in the process of understanding the new tax proposals by US and its impact on our industry?s prospects. The proposals are aimed at addressing the tax rate differentials that exist for companies which run operations globally, and we think this will impact US headquartered companies with overseas operations. The proposal aims to raise the tax revenues for the US and also take away some incentives for the industry when they work outside of US. In our understanding, the tax reforms announced have only just been proposed and there will be extended debate on them before they can be implemented. We also expect to get greater clarity along with some changes before it is finally implemented. It is important to note that most large American companies have significant (more than 40-50%) revenues coming from markets outside the US and would be affected by the proposed tax reforms.?
Bala Rajaraman, Director, Deloitte, opines, ?The proposed changes reflect a fundamental shift in the way the US taxes foreign income. If enacted as proposed, it would expand the reach of the US tax rules and raise the cost of doing business in the US. Together, the overall impact of the proposals would be an increase of approximately 9% in the US tax burden for corporations with foreign-source income.?
He adds, ? The proposed legislation is aimed at creating barriers for global trade and in this age of a flat world appears counter intuitive and this will actually hurt the US industry as also its society in the long run. It is our belief that the Indian IT and BPO industry adds far greater value than just the tax incentives, which the US corporates enjoy and as such expect the impact on us to be minimal.?
On a similar note, BVR Mohan Reddy, Chairman, Infotech Enterprises explains, ? The equation between both countries is thick and outsourcing activities can neither be stopped or reduced.? The industry feels that the proposal is likely to impact captive IT units operated by the US-based MNCs in India. However, MNCs with large Indian captives, such as IBM, GE and Citigroup, are unlikely to wind down simply because of the tweak given to the tax code. Their motives for locating parts of global operations offshore are determined by their strategic interests, not by short-term changes in tax rates.
?The Indian IT should be relatively unaffected by Obama?s proposal to end tax incentives for US companies setting up subsidiaries overseas. Firstly, third party outsourcing companies are not covered by this proposal. It pertains only to American companies that set up wholly-owned subsidiaries overseas, and claim exemption on taxes that might otherwise be applicable on passive income shifted across subsidiaries in different countries. Even in the case of such companies, the offshore value proposition offered by their Indian subsidiaries is extremely high, and will not be dented significantly by the withdrawal of these tax incentives,? adds Arjun D Rao, CEO, ValueLabs.